Knowing the workings of financial statements is important if you want to be successful in business. Here is an introduction to the most crucial reporting statements you need to be familiar with.
What follows are the three financial statements considered to be the most important for young or up-and-coming entrepreneurs, according to most experts in the field of Financial Accounting - Reporting:
The Statement of Financial Position or the Balance Sheet
The Statement of Income or The Profit & Loss Statement
The Statement of Cash Flow.
The Balance Sheet is where you can view the assets, liabilities, debits and credits of a business, as well as their equities. It can be viewed in the same way as, "how was this business doing at (place date and year here)." These statements usually are headed by a line such as The Statement Of Financial Position as at dd/mm/yyyy, followed by the financial information.
Unlike a Balance Sheet that is a 'snapshot' of economic resources, the Profit and Loss Statement is a summary of the flows of earned revenues and incurred expenses of a business for a period of time. These statements would typically be headed by the line Profit and Loss Statement for the Year 200X.
The Statement of Cash Flows summarizes the 'cash' effects of the activities of a business for a period of time. These activities can be operating, investing and financing. We must repeat the word "cash", because this is the common denominator in such statements. These are purely cash-related activities and nothing else.
To summarize the above even further.
You will find the property that you own as well as the methods in how you had acquired these properties on the Balance Sheet.
The Profit and Loss would document how much money you earn per period and the amount of expenditures.
The Statement of Cash Flow is a summarization of how operating, investment and financing activities contribute to the transfer of cash.
For most freelancers, when starting a small business, attention should be placed on your Profit and Loss statement because that is your record of how much income is coming in and how much expenses is going out. It is imperative to descry this particular statement so you can find out for yourself which activities are the most financially lucrative and which activities are the cause of the most financial tension - and once you have figured out the latter, you would then need to figure out one more thing for yourself and your business. Are there ways in which you could cut your costs?
Every start up business must be able to harness their expenditures at the start of their enterprise. No cost item should go by unnoticed or unmonitored. Unjustified costs are frivolous and must be avoided. Money grows not on trees. The money you fail to track is money flushed down the commode which could have otherwise been put to use productively.
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